Bank of Israel shocks with rate cut to 2%
Analysts had been confident the central bank would wait, but did anticipate steps to cool down the roaring residential property market.
The Bank of Israel's monetary council totally surprised the financial community on Monday by lowering the benchmark interest rate for November by 0.25 percentage points, to 2%.
Consumers pay a higher rate than the official Bank of Israel rate. But because of the central bank's action, commercial banks will be lowering their rates by 0.25% as well. This includes interest customers pay on overdrafts on their checking accounts.
"The decision to reduce the interest rate for November 2012 by 0.25 percentage points to 2% is consistent with the Bank of Israel's interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1-3% a year over the next twelve months, and to support growth while maintaining financial stability," the central bank said in a statment.
The lower interest rates follow a series of macroprudential steps by the supervisor of banks, David Zaken, to constrain mortgage lending in order to cool down the roaring real estate market.
The monetary committee cited Zaken's action in its decision to lower interest rates, a move that would normally not be taken amid inflationary pressure.
"In light of the increases in home prices in recent months, and the continued increase in housing credit against the background of low interest rates in the mortgage market, the Supervisor of Banks at the Bank of Israel decided to issue a directive limiting the loan-to-value ratio, in order to support the stability of the banking system," the central bank said.
"The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the continuing high level of uncertainty in the global economy."
Economists at Leader Capital Markets criticized the central bank's decision, saying it appeared Bank of Israel Governor Stanley Fischer was concerned about the global economic environment, though the figures indicate improvement.
The firm also said the Israeli economy was growing at a nice pace, close to its potential, and household consumption was growing.